Hilton and Accor’s development partner in China has problems threatening the global economy
Country Garden, what was once the largest real estate developer in China, spectacularly tumbled from its lofty position in recent weeks amid reports the company lost billions of dollars and racked up a similarly seismic load of unpaid debt.
The developer's problems have economists on edge as they weigh whether this will have a contagion effect on the broader global economy. While Country Garden's woes concentrate on housing, the developer does have major ties to the hotel industry.
Hilton partnered with Country Garden on a variety of brand expansions in China. There was a 2018 agreement that announced many Country Garden hotel properties would get Hilton management largely under the DoubleTree and Hilton Garden Inn brand families.
Hilton's biggest known partnership with the developer arrived in June 2020, when the companies agreed to an exclusive management license agreement where a Country Garden subsidiary would build more than 1,000 Home2 Suites in China.
Accor and its Ennismore lifestyle hotel arm also have a partnership with Country Garden and its hotel development subsidiary. The companies announced last year a plan to open at least 1,300 hotels for the Jo&Joe brand (essentially Accor's version of Moxy). This was an explosive growth agreement for Jo&Joe, which currently only has six hotels in the world, according to Accor's website.
What the hotel companies are saying: not much
There are global ramifications to Country Garden's financial woes, which would be another blow to the struggling real estate sector coming out of pandemic restrictions. The collapse of another Chinese real estate developer, China Evergrande Group, in late 2021 rattled stock markets around the world.
Hilton declined to comment to TPG regarding how many of the planned 1,000-plus Home2 Suites were already under construction or had opened in China. Additionally, the company declined to comment on whether the issues put the Home2 Suites expansion in jeopardy — or any other questions related to the Country Garden partnership.
An Accor spokesperson did not respond to TPG's request for comment in time for publication.
For now, there is an expectation that Country Garden's issues remain largely isolated to the housing side of the business and that hotels won't be affected.
Hotel companies clearly remain interested in expanding their presence in China. There were 3,659 hotels in various stages of development at the end of March, according to the most recent available data from Lodging Econometrics. Hilton, with 693 projects in the pipeline, led the pack among the major Western hotel companies. IHG Hotels & Resorts came in second place with 470 hotel projects, followed by Marriott International (373) and Accor (223).
But there has been a noticeable shift in tone among hotel companies and the broader business community in diversifying their portfolio of destinations and places they do business in Asia. Vietnam increasingly pops up on lists for waves of hotel development. India was a frequent topic of growth opportunity at recent hotel investor conferences.
"When you think about the power of the Chinese outbound traveler with that rising middle class and the wealth creation there, India is going through that same evolution," former IHG CEO Keith Barr said earlier this summer during a panel at New York University's International Hospitality Industry Investment Conference. "On that population size, you should have a significant outbound travel impact on the industry in the years to come."
India is expected to become the fifth-largest source of outbound travelers in the world and the third-largest domestic travel market by 2027, according to a Bernstein report.
"People tend to forget that India alone has probably 500 million people in the new emerging middle class who never really traveled abroad," added Sebastien Bazin, Accor CEO. "Those 500 million people would go farther and away [to places like] Southeast Asia [and the] Middle East. If you get 10, 20, 30 ... [or even] 70 million of them? It's a game changer for the industry. So watch out for India."
The real cause for concern for hotel companies in China
While the Bernstein team didn't signal any trouble for Western hotel companies amid the Country Garden issues, there is a recent report from the company's analysts indicating there could be a different kind of struggle on the hotel horizon in China.
Local companies are increasingly moving up the chain scale to better compete with international players like IHG, Hilton and Marriott with loyalty programs and hotel offerings. The development logic to date has been that Western companies did higher-end hotels better than what the Chinese companies could offer, but that thinking appears to be waning.
The three largest Chinese hotel companies — Jin Jiang Holdings (owner of Radisson's non-Americas business), H World (which also partners with Accor in the region) and BTG — trounce the U.S. and European hotel conglomerates by size in China. Further, their loyalty programs are also formidable players: H World's roughly 200 million members give it the bragging rights of being the world's largest hotel loyalty program — beating out Marriott Bonvoy by roughly 20 million.
"I think there is a sense around the general long-term risk in China around whether it's the macro-stress environment in China or the competitive situation," said Richard Clarke, a managing director who covers the hotel industry at Bernstein. "That probably partly explains why a lot of companies have taken this license structure in China because they don't want to be like Starbucks, where Starbucks owns its properties in China and is facing local competition. The risk is high."
By having a local development partner who takes on most of the financial burden, hotel companies can enjoy some of the upsides of the properties performing well. But they also don't end up losing much if there are any bumps in the road. That's a smart strategy, especially if more Chinese hotel companies start competing head-to-head with the likes of Hilton and Marriott for luxury travelers in the region.
"I think the prevailing Western view is that Chinese companies in China compete in the budget level of the market and therefore don't compete with the Western companies," Clarke said. "That, I think, is increasingly becoming not true."
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